The Role of Management Consulting

The hearings on the Galleon insider trading case have begun. Two of the accused Anil Kumar (turned witness) and Rajat Gupta are former McKinsey consultants. So naturally, there is light being shone on McKinsey and management consulting.

John Gapper in the FT

The calculation every client makes is, in the words of Christopher McKenna, a professor at the Oxford university’s Saïd Business School who studies professional services firms, that “consultants will carry information in and information out. The client has to decide which of those flows is worth more.”

Indeed, one of the main reasons companies hire consultants is to make sure they do not fall behind what their competitors are doing – in return for parting with their own secrets, they gain access to their rivals’ suitably disguised “best practices”. The consultant is a broker who attempts to amass so much knowledge that each company has to hire him, no matter how uncomfortable that feels.

The value in hiring management consultants lies in broadly three (overlapping) areas:

  1. Superior analytics skills – Firms like McKinsey do hire some of the best business brains.
  2. Expertise – industry or functional expertise.
  3. Best practices

The third – best practices – does overlap with expertise, but differs in a crucial way. Expertise could be acquired either because you were a part of industry or because you have been a consultant to that industry (or function like Marketing or HR) for many years. But best practice is just about knowing what the best companies are doing.

Hiring consultants to get industry best practices analytical skills is quite common. There was a time when smart MBAs were concentrated in management consultancies and were hired by companies just looking for smart analytical types to fix problems that their own managers were not able to.

But hiring MBAs became commoner in the industry as business schools kept churning them out. This redressed the IQ balance somewhat. Which forced management consulting firms to shift more towards hiring people from the industry (acquiring expertise) and to offering best practices.

In many cases, hiring a management consultant for best practices is perfectly alright. In functional areas like HR for instance. Although, hiring somebody with the expertise as an employee might be better.

But if you hire a McKinsey for core business strategy you have to be pretty convinced that your executive row has the wrong people. Even then, if you were the CEO, wouldn’t you make changes to your exec team rather than seek outside help?

Outside of management consulting I see no dilemma. In IT consulting for instance, there is a certain complementarity in the expertise that the IT consultant brings. Assuming that IT is not core to the company (i.e. you are not there is every reason for the company to tap the technology expertise with a consultant.

Management consulting is the only kind of consulting where most of what they do is not complementary to what the client’s leadership is doing. It makes up for their deficiencies.

The companies who therefore use them for core stuff have admitted to themselves that a) their exec team cannot rise to challenge and b) in the inflow-outflow that Chris McKenna speaks of above, they will definitely gain from the inflow more than they can lose from the outflow of information.

You know who’s never used consultants? Warren Buffett.

3 thoughts on “The Role of Management Consulting”

  1. There are several other reasons why the Industry hires management consulting companies:

    1. Objectivity of advice. This is an obvious with financial audit, where companies are mandated to obtain an independent audit of their books. Even with other kinds of advice (business strategy, operational efficiencies, risk management, etc.), CXOs often ask for objective, third party advice because they want unbiased points of view that vested Industry chieftains may not be willing to provide.

    2. Art of the project. Industry practioners are focused on meeting operational goals, whereas management consultants strive to solve specific problems in a time bound manner. There is an art to defining problems, breaking problems down to smaller ones, structuring the analyses around these mini problems in a time boxed manner, and delivering specific, defined deliverables. One can learn project management anywhere, but it takes repeated project work to be able to run projects in an effective manner. This becomes all the more important with abstract projects that are loosely understood and defined to start with. Good management consulting companies specialize at precisely this art form. Can the Industry not build this kind of expertise, despite its focus on operations? Indeed, large Industry companies have strategy offices and PMOs. But the strategy offices are typically thinly staffed (and often by ex-management consultants who are tired of the lifestyle) because of the unpredictability of having to solve specific problems.

    3. Accountability. What happens when the program director for a large transformational project fails to deliver the goods? That person gets fired. What happens when an SI firm responsible for the project fails? There is a law suit that may bring the company down. CXOs are a lot more comfortable holding a third party accountable for large programs, and this is not just because of IQ, Industry knowledge or best practices.

    4. Old ways versus outsider perspective. There is no doubt that outsiders can bring a fresh perspective to a problem. This perspective may not always be right or effective, and a fresh perspective can also be provided by insiders who have been newly assigned to a problem. However, the very nature of Industry companies prohibits frequent re-allocation of people.

    So, there is more to why Industry companies hire management consultants. Over a long run, the survival of the management consulting industry will be driven by economics (better compensation attracting brighter minds), but it seems that there are these specific reasons why the Industry will continue to hire management consultants. Self-serving, defense of the management consultant? I believe not.


    1. Srini,

      My commentary is limited to management consultants. And even there my problem is with companies that hand over business strategy on core stuff. Apparently, even with this delimitation it accounts for most of the work that the top management consulting firms do.

      Your points above, except for #2, all point to the “deficient management” hypothesis that I make in the main post. For example, if the company’s leadership is all wedded to the old ways, shouldn’t they make way for leaders who aren’t?

      Some more discussion on these lines on my cross post here.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s